Barclays Downgrades Atlas Pipeline Partners, Cuts Price Target

By Michael Aneiro

Master limited partnership Atlas Pipeline Partners LP (APL) unit price is down another 3% Wednesday to $30.08, marking a second day of losses following a disappointing earnings report. Barclays today downgrades APL to equal-weight from overweight and cuts its price target to $35 from $41. From Helen Ryoo and Richard Gross of Barclays:

Our $35 PT is based on a 12-month distribution run rate of $2.61 (vs. $2.68 previously) and a target yield of 7.5% (vs. 6.5%). While we believe APL’s current valuation (8.0% yield) is cheap vs. its 3-4% distribution growth prospects over the next 2 years, continued high leverage, high equity yield (leading to higher cost of capital), and $450-$500 mm of capex funding requirements in 2014 could put pressure on project accretion going forward. We believe this could result in modest distribution growth for an extended timeframe. Importantly, potential overbuilding of processing capacity in the Eagle Ford could continue to concern investors, regarding APL’s ability to contract Silver Oak II at its expected rate of return.

Barclays notes that APL reduced its previous 2014 guidance by 13% and pushed it out by a year, making it the new 2015 guidance, while pointing to APL’s large capex program. More from Barclays:

Given that a majority of APL’s 2014 commodity price exposure is hedged, upside or downside to forecasts will mostly come from realized volume performance…. However, given a lack of signed contracts to support visibility, we believe execution risk exists. Upside to guidance could come from potential new project announcements for 2015 cash flowing the same year, as current guidance only includes projects already announced.

Shameless plug time: for a more detailed discussion of MLP execution risk, see my MLP roundtable story in this week’s Barron’s magazine.